The Yahoo Patent Crisis and the Cold Soft-War

April 11, 2012 by

As long as I’ve been alive, the software patent landscape has resembled McCarthy-era international relations, with the industry’s heavyweights quietly amassing volatile patent stockpiles while maintaining an icy but civil relationship. Patent portfolios have generally been used to strong-arm smaller competitors into submission, rather than being trained on other big players. Nobody has wanted to risk igniting the patent apocalypse.

That is, until now. With Yahoo’s lawsuit against Facebook last month, alleging infringement of 10 of Yahoo’s patents, we may have the software equivalent of the Cuban Missile Crisis on our hands.

Immediately following the announcement, the heat has turned up on the Cold Soft-War. Facebook responded with a countersuit against Yahoo before buying up 750 patents from IBM to bolster its defense case. Yammer CEO David Sacks ratcheted up the acrimony against Yahoo by publicly blacklisting Yahoo’s employees from ever working at his company if they don’t leave within 60 days. But the most significant and tangible event to come of this was Microsoft’s recent deal to buy 800 patents from AOL for a whopping $1 billion in cash.

There’s no question this deal resets the market for Software Patents. The impact of $800m on AOL’s market cap implies that the market previously undervalued their patent portfolio by 80%. And while 300 of the patents were purely defensive non-exclusive license agreements (“promise you won’t sue us for violating any of these”), the 800 they acquired outright could be used offensively in case Microsoft finds itself in its own patent war, especially one with Google over search, advertising, or social media. They’re taking the threat of a patent apocalypse seriously, and stocking up on canned goods and ammunition in preparation.

Whether or not the Yahoo Patent Crisis will spark an apocalypse largely depends on how successful it ends up being for Yahoo. If they lose the suit or settle for less than their legal expenses, other lawsuits won’t likely follow, especially given the negative damage to Yahoo’s reputation. The market for patents would also likely fall from the elevated price Microsoft paid. But if the lawsuit proves to be a bonanza for Yahoo, we could easily see other patent-rich software companies, like Microsoft (which now owns 20,000) or IBM (30,000), looking to monetize their portfolios at their competitors’ expense.

So what does this mean if you aren’t one of the big powers?

While the thought of a patent apocalypse is indeed a scary thought, it isn’t necessarily a bad thing for expansion-stage companies. Established leaders have always used patents to squash start-up competition, so breaking the taboo on bulge-bracket patent suits will give the legal teams that execute them much bigger fish to fry. Additionally, if your expansion-stage company is able to patent an original idea, the IBMs and Microsofts of the world have more of a reason to buy you out to retain that patent, versus just copying the technology and crushing you.

As they say, every mushroom cloud has a silver lining.